With the basis period reform now fully implemented, alongside changes to Capital Gains Tax and proposals to limit Inheritance Tax reliefs, farmers may be faced with the dilemma of determining the most appropriate and tax-efficient way to structure their business.
Whether you decide to operate as a partnership or company will depend on many factors, but these recent changes mean it’s worth reviewing your current structure, with family succession plans being taken into account.
Tax on limited companies
If you operate a limited company, you have more flexibility in how you pay yourself – either through a regular salary or dividends. However, remuneration planning is not just about tax efficiency. Once you set a precedent for a higher salary, it can be difficult to reverse if tax rates change.
Those receiving a salary as a company director will now pay an increased rate of Class 1 employer National Insurance Contributions (NICs), which rose to 15% in April, up from 13.8%, as well as employee NICs at 8%.
While it was once more tax-efficient to extract profits via dividends, the dividend tax-free allowance remains at £500 for 2025/26, and dividend tax rates continue to apply at 8.75%, 33.75%, and 39.35% depending on your income band.
Corporation Tax rates, introduced in April 2023, remain unchanged. For a farming family with no associated companies:
Profits up to £50,000 are taxed at 19%
Profits between £50,001 and £250,000 are taxed at a marginal rate
Profits over £250,000 are taxed at 25%
This means a company making £100,000 profit will pay around £3,750 more in Corporation Tax than before the rate increase. However, this is still less than the 40% Income Tax paid by a higher-rate taxpayer in a partnership.
Changes for partnerships
Those operating a partnership are treated as self-employed for tax purposes and pay class 4 NICs, the rate of which reduced to 6% on 6 April 2024.
The basis period reform now means all unincorporated businesses are taxed on a tax year basis.
This change may have led to higher tax bills in January 2025 for those whose accounting year did not align with the tax year, due to transitional rules. Going forward, profits will be taxed based on the 6 April to 5 April tax year, regardless of accounting year-end.
Capital allowances to consider
While a partnership can claim up to £1 million capital allowances via an Annual Investment Allowance (AIA) claim – and there are few farming businesses who spend more than this in the same accounting period – from 2026, companies will be able to claim 100% tax relief on an unlimited amount of expenditure for plant and machinery. It is also worth bearing in mind that this only applies to the purchase of new plant and machinery, whereas AIA can be claimed on the purchase of second-hand equipment.
Partnership or company?
The decision to incorporate or remain as a partnership is not straightforward. For farmers reinvesting profits and not needing to withdraw large sums, paying Corporation Tax at 25% may be preferable to paying Income Tax and National Insurance of 42%. However, partnerships offer greater flexibility in moving funds and assets, which can be advantageous in succession planning or restructuring.
As always, it is essential to base a decision on your personal and family circumstances, while taking into account factors such as personal liability and access to capital, as there is certainly no one answer that applies to all farming businesses, and it may be beneficial to explore both structures.
To explore whether a partnership or company is the most suitable way to operate your farm business please contact our agricultural team on 08081445575 or email help@armstrongwatson.co.uk.
